Potential deal could face regulatory hurdles, might stall T-Mobile's momentum if it is actualized

This one is bound to generate some controversy if it's true -- The Wall Street Journal's Ryan Knutson, Eyk Henning, and Thomas Gryta are reporting that Japanese mobile carrier Softbank Corp. (TYO:9984) -- majority owner of Sprint Corp. (S) -- is planning to try to turn around its unprofitable subsidiary by making a bid for T-Mobile USA (which is traded as T-Mobile US Inc. (TMUS)).

I. T-Mobile USA -- is it For Sale?

The report claims:

Sprint Corp. is working toward a possible bid for rival T-Mobile US Inc., people familiar with the matter said, setting the stage for a giant telecom merger that if permitted by regulators would leave the U.S. wireless market dominated by three big companies.

Sprint is studying regulatory concerns and could launch a bid in the first half of next year, the people said. A deal could be worth more than $20 billion, depending on the size of any stake in T-Mobile that Sprint tries to buy.

T-Mobile wide
[Image Source: Flickr (top); Getty Images (bottom)]

Further there's some thought that the potential seller might be willing; The WSJ report states:

Deutsche Telekom ... is looking to possibly exit the U.S. market, the people said.

That may be puzzling for some.  It would be easy to understand why Deutsche Telekom would want to sell T-Mobile USA.  But its recent purchase of MetroPCS and merger of the revitalizing fresh fresh blood into T-Mobile USA appeared to represent a more patient approach, particularly after Deutsche Telekom agreed not to sell shares in the newly formed merged entry for 18 months.

Or did it?

In April Thomson Reuters I/B/E/S reported that "sources familiar with Deutsche Telekom's thinking" claimed the move wasn't a long term commitment, but rather a savvy bid to make the fallen assets selleable.  One of these sources stated:

MetroPCS is not a game changer for T-Mobile, although it should have it to make it more attractive.  Deutsche Telekom is willing to give up control of T-Mobile. T-Mobile is in play.

And Deutsche Telekom Chief Financial Officer (CFO) Timotheus Hoettges' revealed something interesting to reporters in May 2013, stating:

There is an exception clause in the contract regarding the lock-up.  We are in a position to sell all shares in one go.

And in November T-Mobile sold 9 percent of the outstanding shares in the merged company (66.15 million, reducing its stake in the merged company from 74 percent to 67 percent.  The deal revealed another convoluted disclaimer to the share sale prohibition; as the sale's $1.96B USD in prospective generated cash would be used to purchase spectrum for the merged carrier it wasn't technically considered a "sale" by Deutsche Telekom.

Deutsche Telekom
A German Federal court has forced Deutsche Telekom to pay to police its users.
[Image Source: MobiFrance]

Thomson Reuters I/B/E/S writes of the deal:

Deutsche Telekom, which owns 74 percent of T-Mobile, said on Twitter that its stake would be cut to 67 percent after the sale, but that it was not selling its shares.

Huh, alright -- so you're selling shares, but you aren't selling them?  Needless to say this odd (non-)sale was seized upon as further evidence that Deutsche Telekom's end goal was to offload T-Mobile USA, although it would need a buyer to do that.  Now -- if the WSJ report is to be believed -- it may have found just such a propsective buyer.

II. What Does This Mean?

Verizon Communications Inc. (VZ) solely-owned subsidiary Verizon Wireless is currently the largest carrier in the U.S.; AT&T, Inc. (T) is the second largest U.S. carrier. Together they control two-thirds of the U.S. market, formed from dozens of mergers of the "Baby Bells", small carriers that were formed in the wake of the U.S. Department of Justice's (DOJ) 1982 breakup of the American Telephone and Telegraph monopoly.

The "uncarrier" T-Mobile USA -- whom German carrier Deutsche Telekom AG (ETR:DTE) owns 67 percent of the outstanding shares of -- is the fourth largest carrier in the U.S.; while Sprint -- 80 percent owned by Softbank following a $21.6B USD acquisition -- is in third.  Together the pair control the remaining third of the U.S. cellular subscription market for major carriers.

From a simplistic viewpoint a Softbank purchase of T-Mobile USA and merger with Sprint would leave America with just three large carriers, at a time when more Americans than ever before are using this market for more purposes than ever before.

U.S. Carriers

The pecking order would remain more or less unchanged, with Verizon on top, followed by AT&T, and then Sprint/T-Mobile in terms of postpaid (contract) subscribers.  Wholesale (MVNO) numbers would play out in a similar fashion.

MVNO by carrier

But an underlooked aspect is that the merged entity would be that the newly formed entity would be effectively a monopoly in the non-resale prepaid market, where it would have a 2/3rds market share, owing to the combined MetroPCS (T-Mobile), Boost (Sprint), and Virgin Mobile (also, Sprint) prepaid brands.

Prepaid market share

This is one key roadblock to a deal -- antitrust regulators could require the pair to sell or spin off at least one of their prepaid brands, prior to approval of the merger.  And considering how vital these brands are to the companies' revenue, that could be a dealbreaker.

Indeed, the report suggests that T-Mobile and Sprint (and their foreign owners) are wary of government intervention to stop the potential reduction of options in the already.  This likely stems not only from the decrease in the number of major carriers, but also the dramatic decrease in choice in the prepaid market.  The picture becomes slightly less drastic if you lump MVNO and prepaid together, but it's still one of the deal's most troubling problems.


Source: WSJ

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